Gary Kelly talks about sticking to point to point and AirTran Integration

Southwest cheif exectuive Gary Kelly was insightful on a wide range of issues at the JP Morgan Aviation, Transportation and Defense conference today. Here’s his take — in his own words — about evolving to capture more passengers while sticking to the point-to-point basics. Be sure to also read his take on the AirTran integration.

Thoughts on evolving more towards a network model — not hardly!

I won’t argue that point that we may be moving closer, but the gap is still very wide. Case in point when I started in 1986, 80% of our customers flew nonstop, and probably up until 2008 it was still probably 80%, remarkably. And today we’ve inflated our load factors, happily, and that increase in load factors has been driven by an increase in connecting passengers. So we have made ourselves more accessible for those connecting itineraries. But we’re still not a hub-and-spoke carrier. We’re still very, very far from that and roughly 75% of our originating passengers are nonstop….I don’t see us moving in that direction, but it is nice to have a blend of itineraries and that is certainly a large part of our revenue improvement during the last couple of years. I don’t think we want to push the connections too far.

On integration risks with AirTran

Well I’m not worried. But it is a lot of work and it has to be our number one priority. I think my main concern would be that we over-commit with too many big initiatives and under-perform or just don’t execute well. So we’ll need to be prepared to adjust our resources and our focus if things become more challenging than we thought. So we want to keep the wheels on both businesses during this integration process, we want to do a good job of harvesting the synergies that should naturally come with AirTran and Southwest combining networks. The technology, I think it is something that we feel like we can manage, we haven’t seen any enormous issues there for the integration process. We are contemplating as an example that we’ll replace our maintenance technology with some technology that AirTran uses. We haven’t committed to that yet, but that’s an example of a working idea that we’re pursuing. I’v already talked about our own reservation system technology – an example there is doe we bring AirTran over into our current res system and then convert, or do we have Southwest and AirTran convert into an all new reservation system? And so we have those issues that we’re planning for right now. The fleets are pretty well under control. There is obviously a physical transformation to take place. They have 737-700s and then they have the Boeing 717, which is a different airplane than what we operate. We know that. We’re actually enthused about bringing that airplane type into our fleet. We have plans to physically convert their cockpits, their liveries, their seats – We’re not going to make any galley configurations as far as I know. There’s a plan for that. There’s a plan for training and integrating the employees…..

The work that is before us that is very exciting of course is to take their network and in a reasoned and measured way integrate it and make changes and tune it and integrate it into the Southwest network.

At this point we have no plans to instantly change their network, we have no plans to close any cities. We have no plans to add any cities, and clearly the focus for us will need to be on Atlanta. It’s just a big operation for us to inherit and they have a different operating style there. It’s clearly a hub and spoke operation so we’ll want to get in and work with the AirTran experts, understand it, before we start going in and making changes.

And, on Southwest’s international strategy

We have launched our international connect product with Volaris last year – Volaris is the second largest carrier in Mexico. The number of city pairs that are offered on a connecting basis at this point are very modest and so we’re not seeing a large response to that product yet. The schedules also are not fully aligned to allow for as many connecting itineraries. So they’ll continue to grow – they being Volaris will continue to grow with transborder flights into the United States and that will be the primary growth mechanism that we’ll see over the next several years.

In the mean time we need to replace our reservation system technology to allow for international itineraries. Current Southwest technology – legacy technology – is all domestic. It’s worked very well for 40 years. We need a new system for the next 40 years. So that will come up over the next couple of years with the timetable that hasn’t been fully established yet…and at that point we’ll be in a position where we ca launch Southwest transborder flights. Until we get there, I don’t know that we’ll share exactly what our strategy is vis-à-vis codeshare partners and international markets. We’re fully committed to our Volaris relationship and whether we serve Mexico or not I see us continuing to work, and work very well with Volaris. I think there’s a lot of opportunities for us in Mexico, but a lot of questions I think to be answered before we start flying there. In any event we won’t be flying to Mexico or other international destinations for several years.

In the mean time AirTran does have a different reservations system that does allow for international itineraries, and of course during our integration period we’ll continue that international service, or at least that’s what I contemplate right now.